Santa Claus Takes Up Cliff Diving

NEW YORK (TheStreet) -- I may have the contrarian opinion on impact of fiscal cliff, but the stalemate in Washington has ended the Santa Claus rally that began from the market lows of Nov. 16.

Strength from Nov. 16 into Dec. 18 can be attributed to the anticipation that a deal to prevent the fiscal cliff could be reached so that Santa would not be forced to take up cliff diving. Today the odds of getting a meaningful compromise have declined significantly and in my judgment a cliff deal that simply kicks the can down the road is not what investors, businesses and consumers are looking for. Going off the cliff is not priced into the stock market, and a weak compromise deal has already been priced into recent market strength.

Going off the cliff establishes the discipline forced by the Budget Control Act that takes effect as 2013 begins. This law calls for across-the board spending cuts to many discretionary programs, and specifies that the Bush-era tax cuts expire. In my judgment, a stock market sell-off would be healthy given overvalued fundamentals and deteriorating technicals. I would not be surprised by significant market downside similar to the bear market seen at the end of 2008 going into March 2009, but not that severe.

On Thursday we learned that consumers on Main Street agree with my way of thinking. The Conference Board's reading on Consumer Confidence plunged to 65.1 in December from a downward revised 71.5 in November on worries about the fiscal cliff. This puts the index significantly below the 90 to 110 neutral zone you can observe on the chart provided by dshort.com -- Advisor Perspectives .

Today's weekly closes and Monday's year end closes set the stage for the risk/reward parameters for 2013. The keys today are weekly closes relative to the five-week modified moving averages, the most important being 13,106 Dow Industrials, 1415.1 S&P 500 and 2991 on the Nasdaq.

Monday's year end closes for the U.S. capital markets are inputs to my proprietary analytics for calculations of new monthly, quarterly, semiannual and annual value levels, pivots and risky levels. For equities it appears that the downside risks presented by my new levels will exceed the upside potential for equities regardless of the fiscal cliff and ultra loose monetary policy.

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